Navigant Research Blog

Tesla Model 3 Delivery Priority: It’s All About the Cash

Sam Abuelsamid — April 7, 2016

In April 1964, the Ford Motor Company stunned the auto industry by selling 22,000 Mustangs over the first weekend of sales. That figure now seems inconsequential compared to the nearly 300,000 people that have put down $1,000 for a car they won’t be able to get for at least 2 to 3 years. The world seems desperate to secure a place in line for the Tesla Model 3.

However, first come won’t necessarily be first served. According to Tesla, “In order to be as fair as possible, there will be a different queue for each region. And as a thank you to our current owners, existing customers will get priority in each region.”

From Tesla’s perspective, there’s actually a very solid business rationale for getting current customers to buy again before expanding the electric vehicle (EV) audience. While CEO Elon Musk and his team have built the Tesla brand into a technology fashion statement that is arguably second only to Apple, they still have a big problem. While Apple is the most profitable company in history, in its 13-year lifespan, Tesla’s single profitable quarter came from sales of zero-emissions vehicle credits.

Chasing Profitability

It’s expected that a company that makes real physical goods will lose money in the early years of existence as it invests in product development and the infrastructure to build and distribute those goods. However, at some point, revenue needs to exceed spending in order to keep the lights on over the long haul. Tesla is the first successful American automotive startup since Chrysler in 1925, but it’s still unprofitable.

Currently, the cheapest Tesla you can buy is the Model S 70, which starts at $70,000. Tesla doesn’t discuss its product mix or average transaction prices, but it’s probably in the neighborhood of $100,000 or more. Those who have already purchased a Roadster, Model S, or Model X are, to put it bluntly, affluent.

The Model 3 will start at $35,000, and Tesla has given few details about what you get for that price beyond a 215-mile range and supercharging capability. We do know that all-wheel-drive, Autopilot mode, bigger batteries, and more performance will all be available—but pricey—options. A loaded Model S P90D nearly doubles the $70,000 base price.

Affluent customers that purchased a $100,000+ Model S or X and want to get a Model 3 for their spouse or child will probably want it nicely equipped with extra traction, a premium sound system, and so on. The odds are good that most existing Tesla customers will be paying closer to $50,000 than $35,000. Tesla intenders that can’t afford one of the current products might not have the wherewithal to option a Model 3 to that degree.

Higher Margins

Given Tesla’s need to be profitable sooner rather than later, it makes perfect sense to maximize revenue early by taking care of customers that have shown a willingness to buy higher-margin products. Automakers do this every day by stocking dealers with a higher proportion of premium trim levels in the early months after a new model debuts. Early adopters want the best stuff, and Tesla knows this.

Navigant Research’s Electric Vehicle Market Forecasts report projects global battery EV sales of almost 1.6 million in 2024, and the Tesla Model 3 will likely represent a significant portion of those vehicles. Unfortunately, in order for Tesla to remain a viable business, expanding sales volume will have to come before expanding the population of EV drivers.